Moog Inc. — Form 10-Q Summary
Business context and reporting period. Moog designs and manufactures precision motion and fluid controls for aerospace and defense, industrial, and medical markets. This unaudited report covers the second quarter ended April 2, 2011 and the six months then ended; comparisons are with the periods ended April 3, 2010. Amounts below are in U.S. dollars unless stated otherwise.
Financial results and position
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $574.2 million, up 12% | $1,128.7 million, up 12% |
| Gross profit / margin | $167.2 million / 29.1% | $331.8 million / 29.4% |
| Earnings before income taxes | $43.3 million | $89.1 million |
| Net earnings | $30.6 million, up 22% | $64.0 million, up 37% |
| Diluted earnings per share | $0.66, up 20% | $1.39, up 36% |
| Operating cash flow | Not presented for the quarter | $75.9 million, versus $83.8 million |
- Six-month cash used in investing was $37.8 million, mainly reflecting $34.9 million of capital spending and $3.1 million for acquisitions. Cash used in financing was $53.0 million, including net repayments of revolving credit lines of $39.8 million.
- At April 2, 2011, cash was $100.0 million; current assets were $1,337.0 million and current liabilities $485.1 million. Long-term debt carrying value was $718.4 million, including current installments; net debt to capitalization was 34%, down from 36% at October 2, 2010.
- The amended U.S. revolving credit facility provides $900 million of capacity and matures in 2016. It had $332 million outstanding; Moog reported $573 million of unused borrowing capacity, including $556 million under that facility after standby letters of credit. The company reported compliance with its debt covenants.
Material changes versus prior comparable periods
- Sales increased across all five segments in the quarter; Industrial Systems and Aircraft Controls contributed the largest increases. For the first half, the largest increases were in Industrial Systems, Aircraft Controls, and Space and Defense Controls.
- Gross margin was nearly unchanged year over year. Higher volume and more favorable mix were offset by additions to contract loss reserves, primarily in Aircraft Controls.
- Segment operating profit improved substantially in Space and Defense Controls and Industrial Systems. Components’ quarterly operating profit and margin declined; Medical Devices reported an operating loss of $1.5 million for the quarter and $3.0 million for the half.
- Interest expense fell 9% for the first half, reflecting lower average borrowings and interest rates. Operating cash flow declined 9%, with increased working-capital needs, particularly inventory, partly offset by higher earnings and non-cash charges.
Outlook, management commentary, risks and unusual items
- 2011 company outlook: Sales of $2.27 billion, up 7%; operating margin of 10.7%, compared with 10.2% in 2010; net earnings of $129 million; and diluted EPS of $2.80, up 19%. Management expected sales growth in all segments except Components.
- Segment outlook: Aircraft Controls sales of $811 million and 10.2% operating margin; Space and Defense Controls sales of $358 million and 13.3% margin; Industrial Systems sales of $616 million and 10.4% margin; Components sales expected to decline by $10 million with a 15.2% margin; Medical Devices sales of $133 million and a negative 3.4% margin.
- Management said unusually strong military aftermarket sales in Aircraft Controls’ first half were not expected to continue at the same level. Higher contract loss reserves included costs on commercial programs, including Boeing 787 and G250 work, following changes arising from flight tests.
- Medical Devices results were affected by an infusion-pump software issue, a product recall and a $1 million reserve. Shipments of one infusion pump were held pending resolution of the software issue; management expected the recall to reduce infusion-pump sales.
- Moog recorded $32.1 million of non-cash provisions for contract, inventory and receivables losses in the first half, versus $19.3 million a year earlier. Restructuring expense was lower; the company did not anticipate significant additional restructuring charges in the remainder of 2011.
- Management cited exposure to market cycles, government funding and contract termination, customer concentration, price competition, contract cost overruns, indebtedness and covenant compliance, pension funding, foreign exchange, acquisition execution, and medical-device safety and product liability. Goodwill impairment testing in 2010 found reporting-unit fair values more than 10% above carrying values; program delays, weaker demand or unfavorable contract terms could affect valuations.
- The company reported no material off-balance-sheet arrangements and no material changes in contractual obligations. Disclosure controls were judged effective, with no material change to internal control over financial reporting reported during the quarter.
Investor verification priorities
- Track whether sales and earnings meet the 2011 outlook, particularly the assumed improvement in operating margins.
- Monitor Aircraft Controls contract-loss reserves and the durability of military aftermarket demand; assess the expected commercial program impacts.
- Check the timing and financial effects of the infusion-pump software resolution and recall, including the Medical Devices segment’s path to the forecast margin.
- Review cash conversion and working capital, especially inventory growth, alongside capital spending and debt repayments.
- Confirm available borrowing capacity and continued covenant compliance; evaluate pension contributions and funding needs.